9 Feb 2016
We recently had an email through from an adviser detailing how he believes the FOS are failing in the implementation of assumptions and procedures leading to unjust and technically, morally and legally unsafe outcomes. These matters include:-
- FOS using benchmarks for which they do not understand the loss parameters and are therefore unable to safely determine capacity for loss issues;
- The use of investment performance benchmarks over short and specific time periods without considering that different investment strategies provide different returns at different points in the investment cycle;
- The use of benchmarks which are not suitably diversified (85% exposure to just two asset classes), when suggesting to advisers that they should be implementing diversified portfolios;
- A lack of recognition that diversified portfolios do not work in an environment of systemic risk;
- The suggestion that cash is an unsuitable form of investment when cash has exceeded the returns available from the average of cautious, balanced and aggressive managed funds for 80% of the last fifteen years;
- Measuring performance against a given benchmark leads to benchmark hugging by advisers in order to avoid claims and therefore the FOS are encouraging investment into excessively valued assets as demonstrated by the Deutsche Asset Long Terms Asset Return Study - consequently FOS will contribute to the potential collapse in wealth that is now beginning to emerge and the systemic risk that it may bring;
- Measuring performance against a given benchmark which discourages advisers from meeting FCA stated objectives of meeting needs and objectives based on a comprehensive and fair analysis of the relevant market and on an unbiased and unrestricted basis;
- Measuring performance against given benchmarks being contrary to FCA requirements to not unequivocally say upfront what products may be capable of meeting the investment needs and objectives of the client;
- Measuring performance against a given benchmark being contrary to the FCA requirement to consider all relevant markets;
- Advisers have to consider that certain products, including the FOS benchmarks, may not be suitable;
- FOS not allowing the creation of bespoke solutions rather relying upon fitting a model (such as the FOS benchmark) that was not suitable.
- Advisers should consider options outside of certain model portfolios (such as the FOS benchmark) that was not suitable and to avoid treating those models as default solutions, regardless of whether these could be tailored for the clients, and to consider solutions and advise on retail products not held in model portfolios, in order to meet the investment needs and objectives of the clients;
- FOS outcomes do not allow advisers to protect clients from systemic risk where they agree and can evidence that it exists.
- Adjudications being made without any technical or material response to material evidence provided, leading to a lack of technical, moral or legal soundness in those adjudications;
- FOS ignoring the dishonesty of clients in their representations without repudiation or penalty to the client which encourages an inappropriate and dishonest claim and compensation culture;
- Potentially unsafe adjudications being made before a final decision and within the public domain, which can negatively impact the reputation of a business and lead to expectations that may not be met at the final decision stage;
- FOS making adjudications based upon losses which fall within the historical loss and time horizons of their own benchmarks and therefore failing to meet its stated objective of fairness;
- FOS making adjudications on the basis of ‘generally more suitable’ when evidence has been provided that those generally more suitable solutions have not worked in the past and where the evidence of having a future high probability of failure;
- The creation of ‘moral hazard’ whereby clients invest knowing that they can claim if they suffer a loss.
What are your thoughts and experiences on the FOS in 2016? Please tell us now. Entries are anonymous and we will share the results with the press, the FOS and the FCA.
The survey closes on Friday 19th February 2016.